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House Prices and Replacement Cost: A Micro-Level Analysis

  • Rainer Schulz
  • Axel Werwatz

According to housing investment models, house prices and replacement cost should have an equilibrating relationship. Previous empirical work mainly based on aggregate-level data has found only little evidence of such a relationship. By using a unique data set, covering transactions of single-family houses over a 25 years period, we establish strong support for the relationship at the micro level. In the time series context, we find that new house prices and replacement cost align quickly after a shock. In the cross-sectional context, we find prices of old houses and replacement cost are closely related once building depreciation has been taken into account. As to be expected from these results, replacement cost information also proves to be useful for the prediction of future house prices.

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Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2008-013.

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Length: 45 pages
Date of creation: Jan 2008
Date of revision:
Handle: RePEc:hum:wpaper:sfb649dp2008-013
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